Sama investors lose patience over '100 per cent' losses

20 March 2008
Sama shareholders are warning that the airline may be forced to close if Riyadh does not act to reduce the carrier's fuel costs and complete the liberalisation of the kingdom's aviation sector.

Senior investors in the low-cost carrier claim that the government's failure to remove market distortions favouring the national carrier, Saudi Arabian Airlines (Saudia), are making Sama impossible to run profitably.

The company, which only began operations early last year, is making huge losses, with most of its $80m start-up capital already used.

Sama, along with fellow low-cost airline Nas Air, is pressing the government to sell it fuel at the same reduced rate as Saudia, rather than at world market prices. The national carrier currently pays $0.5 a litre for its fuel, compared with the $2.30 a litre Sama pays.

The new low-cost airlines are also struggling with a fare cap imposed on domestic flights in economy class, and are obliged under the terms of their licensing agreements to fly routes to northern cities that are consistently loss-making.

“We recognise that these are lifeline routes, but passenger numbers are extremely low,” says Andrew Cowen, chief executive officer at Sama.

“There is no economic return on these flights so the government should subsidise them.

“We are losing between $4,000 and $5,000 a flight on these northern routes, which adds up to $1m a month. Liberalisation was primarily aimed at increasing frequency within Saudi Arabia, but why would investors invest in domestic routes where it is impossible to make money?”

To partly offset its losses on these domestic routes, Sama is expanding its international services, which are exempt from the domestic fare cap. The airline now flies to eight destinations outside the country, recently opening a route to Alexandria in Egypt. However, Cowen makes clear this is not covering all its losses at home (MEED 25:1:08).

Although Cowen declined to reveal a precise figure, Sama's chairman and main shareholder, Prince Bandar ibn Khaled al-Faisal, spoke recently of “100 per cent losses”.

Cowen says the company's investors are losing patience. “Access to capital is not a problem but the shareholders are not charities,” he says. “If the situation is not altered, it may simply be impossible for the business to make money. Why as shareholders would you continue to support the company in that situation?”

Although he believes the government understands the problem, Cowen says the reality facing the company without rapid action is stark.

“The conditions make it impossible to operate on a private sector basis in Saudi Arabia,” he says. “We will either have to become an international airline or go out of business.”

The General Authority of Civil Aviation (Gaca), which regulates the Saudi airline market, says it is hopeful that a resolution can be reached in the near future.

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